Revenue

Moody’s Plays Buzzkill on Colorado’s Pot Tax Windfall

When voters in Colorado approved legalizing pot in 2012, some wanted to remove the stigma of marijuana, while others just hoped legal sales would help fill the state’s coffers. More than three months after recreational marijuana use became legal, a new report by Moody’s Investors Service (MCO) finds that even with better than expected sales taxes so far, pot’s long-term potential to cure the state budget remains hazy.

Moody’s is cautious for two reasons:

1. Even a better than expected marijuana tax take is still just a sliver of the Colorado budget. The optimistic estimates from Governor John Hickenlooper’s office put tax collections at $134 million for the 2015 fiscal year—which, as Moody’s points out, is just 1.4 percent of the state’s $9.7 billion general fund. And much of the revenue is specifically pegged for drug-related efforts, such as substance-abuse treatment and working to keep kids from using pot. The biggest winners will likely be school districts, which will get $40 million in the marijuana taxes for construction projects.

2. Legalization might not meaningfully reduce enforcement costs. The state and cities will save money on fewer arrests and decreased incarceration for drug possession cases that are no longer illegal. But Colorado also needs to police the new laws to make sure legal sales don’t bleed into the black market. Enforcement already ranges from making surprise inspections to ensure merchants are using a new database that tracks every single pot plant to providing security escorts for marijuana merchants who pay their taxes in cash because they can’t get bank accounts. None of it comes cheap.

Colorado’s marijuana marketplace will change considerably later this year, when a broader range of retailers and growers are allowed to set up shop. Moody’s expects this to lead to a “significant growth” in tax revenue. But significant growth means more sales through some mix of attracting more customers or selling more to each customer. More use leads to more demands on enforcement—and how that all shakes out, Moody’s says, “is still uncertain.”